EIU Global Forecasting Service

China and the US will see limited success in Asian trade negotiations

January 18th 2018

With the US turning away from multilateral trade liberalisation, after Mr Trump pulled the country out of the 12-member Trans Pacific Partnership (TPP), China now has the opportunity to help to set the rules of engagement. We are doubtful, however, that China has the willingness or the capability to take on the free-trade mantle for now. Negotiations on the Regional Comprehensive Economic Partnership (RCEP), a China-focused trade agreement, will continue, but we do not expect these talks to be concluded within our five-year forecast period (2018-22). Part of the reason for the slow pace of negotiation is the size of RCEP. It would cover more than 3bn people if completed, which would rival the size of the TPP. The proposed agreement includes the ten Association of South-East Asian Nations (ASEAN) member states and six partner countries (Australia, China, India, Japan, New Zealand and South Korea). All is not lost on the trade front for China, however, as its Belt and Road Initiative is a major long-term programme that will encourage trade and investment flows with recipient countries.

The appetite for trade liberalisation still exists, but the approach to trade differs among the major economies. The EU and Japan have emerged as key drivers in the effort to maintain the global trading system, while the US prefers a bilateral approach in an attempt to shrink deficits with its trading partners. During a visit to Japan in November, Mr Trump expressed this sentiment with regard to the US's trade deficit with Japan. However, the Japanese prime minister, Shinzo Abe, will resist such pressure, preferring instead to push forward on trade negotiations with the remaining members of the TPP and the EU. The EU and Japan finalised an economic partnership agreement in December, creating the world's largest free-trade area. The deal will come into effect in early 2019, although the economic effects will take years to be felt—some tariffs will fall to zero in 2019 but others will be phased in over 15 years. Nonetheless, the accord sends a powerful signal of support for free trade from both parties. The final deal did not contain rules on data flows and investment settlement, as agreement on these issues remains elusive. The EU would prefer to move away from so-called investor state dispute settlements to permanent investment courts, something that Tokyo will not agree to at this time.

We expect the successful implementation of a revised TPP, to be known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In the latest round of talks at the Asia-Pacific Economic Co-operation (APEC) summit in Vietnam, negotiators made significant progress on so-called core elements, but agreement is yet to be reached in all areas. Brunei, for example, is concerned about non-conforming measures related to its coal industry. Given the lengthy ratification and implementation process, the effects will not be felt until the 2020s, but we expect a modest positive effect on global trade in 2021-22 in the order of 0.1 of a percentage point in both years. The 11 CPTPP members showed their willingness for the US to re-engage at a later date via the suspension, rather than removal, of 20 provisions that relate to US commercial interests. Mr Lighthizer has dismissed this as unlikely. Given these developments, the US is at risk of being left behind on trade liberalisation. After setting the global trade agenda for the past 70 years, the current position of the Trump administration has left the US isolated. If the US decides to rejoin these efforts in the medium term, it will do so with considerably less influence than before.